There is a risk USD/JPY drops below 130: Citi

In a note to clients Wednesday, analysts at Citi highlighted the increasing risk of USD/JPY dropping below ¥130 in the near term due to eroding bullish momentum in the currency pair.

"The fall in the USDJPY has been steeper than we had expected, and there has been a clear loss of long-term bullish momentum," said Citi.

Initially, Citi expected the formation of a symmetrical triangle top over the next six months, but this scenario has now become less probable.

Instead, the bank said it sees a more bearish pattern, likely a descending triangle top. An even more concerning possibility is an island reversal formation, which could drive USD/JPY below the ¥130 mark, according t Citi analysts.

The bank advises caution until USD/JPY can recover to its 21-day moving average, currently around ¥143.5.

They highlight that the pair remains overvalued, with their multifactor model estimating a fair value around ¥137/$.

This model, which had tracked the actual USD/JPY until early 2024, reportedly began to diverge in February due to JPY carry trades stemming from significant short-term interest rate spreads.

The sharp correction in USD/JPY from its recent peak of ¥162/$ to a low of around ¥140/$ aligns with Citi's earlier predictions, reversing much of the previous overvaluation.

However, they emphasize that the pair still has room for further correction, as the current value remains higher than their model estimate.

Given the potential downside risk, Citi urges market participants to remain cautious and monitor the pair's trajectory closely.

By Sam Boughedda

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